1 Unstoppable Stock That Keeps Surging

Investors will always look for ways to protect their portfolios during hard economic times. That’s why discount retailers, infrastructure corporations, and healthcare companies are popular stocks during a recession. The desire for stability in a time of crisis is one of the main reasons why Illinois Tool Works (NYSE:ITW) stock has surged over the past few years.

The manufacturer’s stock has risen 78% over the last 5 years, not least because it’s a well-run company with diversified segments that have consistently delivered profits, even in a recession.

ITW has continued to surge nearly 40% over the last 12 months and it doesn’t appear that the upward trend will change anytime soon.

That’s one of the reasons some investors are becoming hesitant, as fears increase that the upward climb has to slow down, or even reverse course, at some point.

ITW’s dependable growth is a negative for investors who are searching for flashy gains, and bears believe that the recent surge in price has caused the stock to become overvalued.

But ITW is a company that is highly profitable, well-diversified, and funded with a robust cash stock pile. The manufacturer’s products are firmly established in multiple industries, and that demand isn’t likely to decrease.

Dividend investors will appreciate the company’s 2.12% annual dividend yield, meaning $1.31 per share goes back to ITW’s shareholders.

So will ITW stock stop surging?

Illinois Tool Works: 18,000 Patents Is a Wide Moat

Illinois Tool Works is over a century old and employs over 45,000 people across the world. It currently has a market capitalization of $7.8 billion.

One of the its first breakthroughs as a small tool manufacturer was the patent for a specialized washer aimed at the emerging automotive industry. Since then, Illinois Tool Works has continued to innovate, with over 18,000 patents that have been granted or pending, in the auto industry and in many others.

In the 1980s and 1990s, ITW started a bold acquisition campaign that brought over 100 brands under the company’s umbrella. But the new corporation never lost focus on the key ITW values: a focus that starts with the customer and works back, a relentless drive for quality and execution, and a decentralized culture with an entrepreneurial mindset.

How Does Illinois Tool Works Make Money?

ITW currently operates in 7 segments: Automotive Original Equipment Manufacturing (OEM), Food Equipment, Welding, Test & Measurement and Electronics, Construction Products, Specialty Products, and Polymers and Fluids.

The Auto OEM segment is the most profitable for ITW, accounting for 19% of 2022’s total revenue. This segment makes fasteners, interior and exterior parts, and powertrain components for vehicles.

Test and Measurement and Electronics was the next most profitable segment, accounting for 18% of last year’s revenue. Its primary product is lab testing equipment.

Food Equipment accounted for 15% of 2022 total revenue. This includes the Baxter and Foster brands and manufactures cooking, refrigeration, and food processing equipment for institutional, restaurant, and retail markets.

Construction Products represents 13% of last year’s revenue. It manufactures a variety of fasteners for construction applications, as well as construction design software. The Welding division was the next most profitable, with 12% of 2022’s revenue. It includes both welding equipment and safety accessories.

Polymers and Fluids also accounted for 12% of revenue and the segment produces adhesives, coatings, lubricants, and more. Specialty Products was responsible for 11% of 2022 total revenue, and manufactures everything from sandwich-bag zippers to equipment for aircraft ground support.

ITW Free Cash Flow Up 147% YoY

Illinois Tool Works reported revenue of $4 billion in the first quarter of 2023, a 2% increase over the first quarter of 2022. Operating income increased 9% from $895 million to $972 million in the first quarter. Net Income rose from $662 million to $714 million, a 7.85% year-over-year increase.

Increased revenues led to a 10% increase in earnings per share, with EPS now at $2.33. The company has a free cash flow of $615 million, which was up 147% year-over-year. Operating margin of 24.2% was also an increase from last year.

While the company’s financials are extremely positive, ITW’s P/E ratio is 26.42. The high value has caused some investors to believe that the stock is overvalued and bound for a slowdown.

Analysts’ Ratings for Illinois Tool Works

Out of 24 analysts, 16 rated the stock as a hold. Three analysts still consider the stock a buy at this price point, with the most bullish forecast predicting the stock could rise to $281 over the next 12 months, which would represent an increase of 13% from current levels.

The average forecast has the stock trading even for the next 52 weeks, or even starting a slight decline. Four analysts have given sell ratings for ITW, with the lowest forecast predicting the stock will drop over 26% to $183.

Will Illinois Tool Works Keep Surging?

Illinois Tool Works is an equipment manufacturer with a long track record of reliability and profitability. The company’s diversification is remarkable, with each of its segments accounting for roughly the same amount of revenue. And ITW’s first-quarter results were so positive that it caused the company to raise its revenue and EPS guidance for the rest of 2023.

That dependability is precisely the reason why bears believe the stock isn’t an attractive opportunity for future gains. The recent surge in price has led to a high P/E value, causing fears that the stock is overvalued and due for a downturn.

But the reason the stock has surged is because ITW has a reputation as a safe haven. Investors who are looking for a consistent, profitable, diversified company will continue to be attracted to the company. Illinois Tool Works has delivered 59 years of dividend increases, so investors who are looking for a dependable stock in an unsure time should strongly consider ITW.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.